Bridge over ocean
20 August 2018 Financial Analysts Journal Volume 74, Issue 4

Evaluating Spending Policies in a Low-Return Environment

  1. Peng Wang, CFA
  2. Laura Chapman
  3. Steven Peterson
  4. Jon Spinney, CFA

For an endowment seeking to minimize payout variability while preserving the long-run health of the institution, appropriate spending policy is a crucial choice. We study two competing methods for setting spending policy—the “moving-average” method and the “snake-in-the-tunnel” (SIT) approach. We show that the SIT approach may significantly decrease the possibility of spending reductions in the short run. Additionally, the SIT approach with 3%–7% bands allows for a smooth evolution of payouts over time, which enhances spending predictability while preserving the endowment’s real (inflation-adjusted) long-run purchasing power.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.